What Is a Country Fund?
A country fund is a mutual fund that invests only in the securities of companies in one country. Though able to invest in a variety of sectors, country funds are considered to be greatly exposed to political risk without being able to diversify that risk away.
Key Takeaways
- A country fund is a mutual fund that invests in the securities of only one country.
- Though a country fund can be diversified within sectors, it is concentrated in one country, increasing its exposure to political risk.
- A country fund can typically exhibit high returns because of its concentration, but this comes with price volatility and increased risks, particularly in emerging market countries.
- Country funds are opposite to global funds, whose investment portfolios consist of securities around the globe, providing diversification.
- Country funds can be incorporated as a supplement to a global fund portfolio to achieve a country weight while still maintaining diversification.
Understanding a Country Fund
A country fund will invest all or a majority of its assets into the securities of one country. Most country funds do have a small percentage of investments in other countries but are highly concentrated in their country of choice.
A country fund for Russia, for example, will only invest in assets based in that country, such as the stocks of Russian companies, Russian government debt, and other Russian-based financial instruments.
Country funds can demonstrate fantastic results because of their concentrated holdings; however, along with this type of performance also comes a high level of risk and price volatility. This is particularly the case for country funds focused on developing countries, which are usually categorized as emerging markets.
Emerging and Developed Country Funds
In emerging markets, a fund's portfolio may be concentrated in a small number of issues with very low market liquidity, making it difficult for the fund to exit positions if need be. A country fund will also be exposed to the political risk of any country, particularly so if the country has demonstrated a history of instability.
Even in developed markets like Europe, putting investment funds in a single-country fund means that you are subjecting your risk-return expectations to a relatively narrow market environment. It is generally understood that diversification is one of the most prudent investment strategies, in which investing in a country fund diminishes. It is for such a reason that investment experts suggest not to have an entire investment portfolio in only one country fund.
Advantages and Disadvantages of a Country Fund
Country funds can be a great way to gain exposure to stocks in other countries. Barring having a brokerage account overseas, it may be the only way to invest in foreign stocks that do not have ADRs listed on U.S. exchanges.
A portfolio that holds country funds will be more geographically diversified than one with only domestic stocks. This is helpful to minimize a portfolio's risk since certain regions may experience booms while others bust.
A country fund by itself, however, can present concentrated risk. If a country experiences an economic downturn, financial crisis, currency devaluation, natural disaster, or geopolitical event, it is likely to negatively affect all of that country's stocks in tandem. Currency risk is a risk inherent in all country funds, even if they are not experiencing a crisis. This is the exchange rate risk involved in holding foreign assets. Even if a country fund returns, say 10% in capital gains overseas, if it also experiences a 10% exchange rate loss versus the dollar, the net return would be zero.
Country Funds
Pros
Easy exposure to foreign stocks
Geographic diversification
Cons
Country-specific risk
Currency risk
Global Fund vs. Country Fund
Country funds and global funds (also known as international funds) can both be used to add geographic diversification to a portfolio. A global fund is a fund that invests in companies located anywhere in the world, including the investor’s own country. They often seek to identify the best investments from a global universe of securities, regardless of where that security is based.
As such, a global fund provides investors with a diversified portfolio of global investments that reduces their risk exposure. Investing in international securities can often increase an investor’s potential return with only a small amount of additional risk. A global fund can also help to mitigate some of the fears investors may have when considering international investments through its diversified portfolio structure.
An investor could, in theory, construct a geographically diverse portfolio using individual country funds. This would require a great deal of research and effort and could be accomplished simply by selecting a global fund. However, country funds can easily be used to supplement a global portfolio and concentrate a bet on a region, in effect overweighting a single country, while the global fund maintains diversification.
Country funds are easily accessible to U.S. investors. You can buy and sell both mutual funds and ETFs that track specific countries through your broker, and use their screener tools to identify the ones that you are interested in.
Real-World Example of a Contry Fund
The iShares MSCI Israel ETF (EIS) was the first Israel-focused country ETF on the market, and offers pure Israeli exposure, with 100% of its 112 holdings traded on the Tel Aviv stock exchange. The fund has $139.1 million in AUM and charges an expense ratio of 0.57%. Over the past 10 years (through Q2 2022), the fund has returned an average of 6.25% per year.
The top 10 holdings include:
| EIS Country Fund Top Holdings | |
|---|---|
| Bank Leumi Le-Israel Ltd. | 8.27% |
| Check Point Software Technologies Ltd. | 7.26% |
| NICE Ltd | 6.78% |
| Bank Hapoalim BM | 5.95% |
| Teva Pharmaceutical Industries Limited Sponsored ADR | 4.69% |
| ICL Group Ltd. | 4.43% |
| Israel Discount Bank Limited Class A | 3.81% |
| Elbit Systems Ltd | 3.04% |
| Tower Semiconductor Ltd | 2.72% |
| CyberArk Software Ltd. | 2.72% |
Which Country Index Fund Is Best?
Each country fund will track its own local benchmark index. For instance, a country fund focusing on India would use the MSCI India Index to track its performance. It would be inappropriate to use a different country's index (e.g., the S&P 500 in the U.S.) as a benchmark for a foreign country fund.
What Is the Difference Between an ETF and a Mutual Fund?
ETFs and mutual funds are quite similar in that they pool investments to be managed by a portfolio manager. The major differences are in how they are constructed. ETFs tend to be more liquid, trade throughout the day, and often have lower expense ratios than the equivalent mutual fund.
What Is a Good Global Fund to Invest in?
Several global funds exist that track worldwide stocks. One example is the Vanguard Global Equity Fund (VHGEX). The portfolio is made up of 500-plus stocks from more than 30 countries, with roughly half of its holdings in American companies. It charges a 0.45% expense ratio and requires a minimum of $3,000 to invest.
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